Once upon a time in Chile, the land of renewable energy dreams, a few challenges reared their ugly heads. You see, Chile had a fantastic track record of luring in clean energy investors with its charm and well-structured power sector. But unfortunately, as a director of an energy company points out, “Difficulties in accessing credit make it difficult to realise numerous projects, including energy projects and even renewable energy projects.”
Coupled with poorly designed public policies like a green tax on energy withdrawals by companies and price decoupling measures a wrench has been thrown into the sector’s performance. As if that wasn’t enough, a hydroelectric crisis caused by a severe lack of rain, a weak local currency and rising global energy prices has made matters worse. As a director of an energy company in Chile tells us, “Both wind and solar projects have faced opposition from sectors of the population on the grounds of environmental protection. The cases of opposition from conservation groups to the construction of wind farms in southern Chile stand out…projects have been rejected against all odds and despite complying with the requirements of technical bodies, being finally rejected by political bodies such as the Committee of Ministers.”
“Both wind and solar projects have faced opposition from sectors of the population on the grounds of environmental protection.”
A Director of an energy company, Chile
However, Chile isn’t one to back down from a fight. They are working on a clever plan to save the day – a brand new bill to set up a tender mechanism for energy storage facilities. Picture it as a superhero battery pack, adding some much-needed flexibility to the electrical system. This bold move will require a hefty investment of USD 2 billion, but it aims to be up and running by 2026. “Recently, President Boric announced the government’s intention to develop the lithium industry through state-controlled companies, with 51% ownership, in partnership with private companies,” commented a leading bank’s director in Chile, also adding that “to date, Chile is among the world’s leading producers with a 100% privately owned industry and experts generally do not see any operational or strategic advantages for state-controlled companies in the industry.”
In conjunction with this, the Chilean grid co-ordinator, CEN, plans to hire a private firm to design a new power market that allows companies to submit bids based on marginal costs rather than fixed prices. This initiative considers the high penetration of variable renewable energy, the integration of storage systems and the capacity to connect with neighbouring countries.
While all these plans are brewing, the industry big shots are urging the government to take a good look at the high costs causing insolvency issues. They’re also calling for some regulatory certainty, because let’s face it, nobody likes playing a game without clear rules, as a leading investment banker acknowledges, “The fear of some investors is that in the short-term, there will be a significant increase in state intervention or involvement in energy projects or developments.”
“The fear of some investors is that in the short-term, there will be a significant increase in state intervention or involvement in energy projects or developments.”
A leading investment banker, Chile
The success of Minister Diego Pardow’s agenda in tackling these challenges and avoiding a full-blown crisis remains to be seen, as a senior executive of ENGIE in Chile declared a few months ago “Chile is turning into an obstacle course for the approval of energy projects”.
Now, let’s not forget that Chile has had quite a success story in the renewable energy world, thanks to well-structured power sector regulations, efficient renewable energy auctions and standardised power-purchase agreements. All this has attracted a vast USD 21 billion in clean energy investment since 2015, “In the case of the Chilean energy industry, financial difficulties do not seem to be affecting investors most, despite more difficult access to credit. The demand for energy is expected to be strong,” reports our investment banker. But alas, the road to success is never without a few bumps along the way. The banker went on to highlight, “Where the most serious problems lie is in the institutional and political framework, aspects that have burdened investment decisions of all kinds with uncertainty since 2019 but especially for long-term projects such as power plants. This uncertainty has worsened in the areas affected by the Macrozone South conflict, which is spreading over time and affecting areas that used to be calm.”
“Until the uncertainties surrounding the country’s security problems are resolved, investment in renewable energy will fail to fulfil its potential.”
A leading industry expert, Chile
To overcome these challenges and keep the renewable energy dream alive, Chile needs a multi-faceted approach, as reported by a leading industry expert, “Until the uncertainties surrounding the country’s security problems are resolved, investment in renewable energy will fail to fulfil its potential.” They’ve got to find the sweet spot between policies that keep the public happy, solutions that make grid integration a breeze and a regulatory environment that gives investors certainty. It is a delicate balancing act, but with their natural resources and determination, Chile can continue to shine as a leader in the global renewable energy transition.